10 Steps To Investing in Stocks
Putting your money into stocks is a smart move for watching it grow. By consistently setting aside cash for investing, you’ll see its value soar over time. That’s why it’s crucial to start as soon as you can spare the funds—the longer you’re in the game, the better. This article walks you through how much you’ll need, which stocks to pick, and the other fundamentals of diving into stock investing, all in 10 simple steps. Whether you’ve got thousands saved up or can only spare $25 a week, you’ve got enough to kick things off.
MAIN POINTS TO REMEMBER:
- You can boost your income by putting in extra hours, snagging a raise, or finding a new gig. Alternatively, you can let your money do the heavy lifting by investing in stocks and watching it grow over time.
- Investing comes with risks, but there are ways to minimize them, even though you can’t eliminate them entirely.
- First-time investors now have access to a wealth of expert guidance.
- You can learn from articles, books, and courses, or opt for robo-advisors, automated apps, or financial advisors to handle your investments. Alternatively, you can take charge of your stock portfolio yourself.
Step 1: Set Clear Investment Goals
Figuring out how much you can invest in stocks means taking a good, honest look at your finances. Don’t stress if your funds aren’t as hefty as you’d like. Just like you wouldn’t beat yourself up for not being marathon-ready on your first day of training, remember, you’re just starting out on your investment path. It’s a marathon, not a sprint, and you’ve got plenty of miles ahead. Here are some pointers to help you get a realistic idea of what you can work with:
Take a look at your income sources: Start with what you’re bringing in. Check if your employer offers any investment options that come with tax perks or matching funds to boost your contributions.
Build up your emergency fund: Before diving into investing, make sure you’ve got a sturdy financial safety net in place. It doesn’t have to be flawless, but you should have enough set aside to cover major expenses for a few months, like your mortgage or rent, plus your other bills.
Tackle high-interest debts: Financial experts often recommend clearing out high-interest debts first, especially credit cards and other debts with steep rates. The returns you might expect from investing in stocks likely won’t outweigh the hefty interest you’re racking up each month on your credit card bills. If you’re still paying off student loans, weigh how much interest you’re shelling out versus the returns you could get from investing. Decide whether it’s smarter to chip away at your loans or put your money into stocks.
Create a budget: Based on your financial check-in so far, figure out how much you can comfortably invest in stocks. Make sure it won’t eat into the funds you need for current or future expenses. Your budget will help you determine whether you’re starting with a lump sum or investing smaller amounts regularly, like monthly or yearly.
Investing in stocks comes with risks, so it’s crucial to only invest money you can afford to lose. Never jeopardize your financial stability for the sake of investing. This is what sets investing apart from some of the riskiest forms of gambling.
Step 3: Appraise Your Tolerance for Risk
Knowing how much risk you’re comfortable with is key to investing. Assess your comfort level with the ups and downs of the stock market. Your tolerance for risk will vary based on where you are in life, your financial goals, and how much of a financial safety net you have to handle any potential losses.
Understanding your risk tolerance is vital for shaping an investment plan that aligns with your financial objectives while also giving you peace of mind. It guides you in choosing the right stocks for your portfolio and determining how to respond to market fluctuations. Don’t let yourself be swayed into taking unnecessary risks or being overly cautious. Do you prefer stability, or are you open to embracing higher risks and fluctuations if it means the potential for greater returns? This self-assessment lays the groundwork for your investment journey.
Stocks can be categorized by their level of risk. For instance, large-cap stocks are generally more stable as they belong to well-established, prominent companies with a solid presence in the market. Small-cap stocks, on the other hand, typically offer more growth potential but come with greater risk. Similarly, growth stocks promise rapid gains but also entail higher risks, whereas value stocks aim for steady, long-term growth with lower risks.
Step 4: Determine Your Investing Style
Everyone’s relationship with money is unique. This impacts how comfortable you are with taking risks. But beyond that, investors also have their own preferred styles. Some like to be hands-on, diving deep into spreadsheets to fine-tune their portfolios, while others prefer a more hands-off approach, trusting that their investments will grow steadily over time with minimal intervention.
And then there are those who simply don’t have the time to actively trade, keeping up with market news and updates on investment platforms. It’s important to realize that your style may change over time, but you have to start somewhere, even if your approach isn’t set in stone.
Here’s a simple guide to help you figure out your investing style:
- Do-it-yourself (DYI) investing: If you’re pretty savvy about how stocks operate and feel confident navigating the market with minimal guidance, managing your own stock trades is an option. You can open an account with reputable online brokers to access various investment options like stocks, bonds, exchange-traded funds (ETFs), index funds, and mutual funds. This route gives you complete control over your investments, although you might still choose stock funds managed by professionals who have a duty to oversee your funds.
- Working with a financial advisor or broker: For those who prefer a more hands-on approach and want personalized guidance, an experienced broker or financial advisor can be a huge help. They provide tailored advice based on your life experiences and goals, assist you in selecting the most promising stock options, keep an eye on your portfolio, and work with you to make adjustments when needed.
Step 5. Choose an Investment Account
Now that you’ve nailed down your goals, how much risk you’re comfortable with, and how hands-on you want to be as an investor, it’s time to pick the type of account you’ll use for investing. Each option comes with its own perks, drawbacks, and unique features.
Here are the most common:
Retirement Accounts
Your employee retirement plan: If your employer offers a retirement plan, it’s a convenient way to invest in stocks, possibly including those of the company itself. These plans go by various names based on the sections of the U.S. tax code. The most common are 401(k)s (private employer-sponsored retirement savings with tax deferrals), but you might also have a 403(b) (commonly used by nonprofits, public schools, and some churches), a 457 (primarily for state and local public employees), or a similar plan. You contribute to your account automatically with each paycheck, and many employers match your contributions, giving your investment a boost. Your contributions are tax-deductible, and the account balance grows tax-deferred.
Individual retirement account (IRA): In addition to your workplace retirement plan, if you have one, you can start investing in stocks by opening an IRA. IRAs offer some tax benefits, and you have the choice between a traditional IRA (with tax-deductible contributions) or a Roth IRA (with tax-free withdrawals in retirement).
Taxable Brokerage Accounts
If you want more flexibility or have already hit the limit on your IRA contributions, a regular taxable brokerage account is a solid option. It offers a range of investment choices, like individual stocks, stock mutual funds, ETFs, and stock options. Unlike retirement accounts, they don’t come with tax advantages, but they’re more flexible and don’t have contribution limits. Plus, you can select different taxable brokerage accounts that align with your investment approach.
Individual brokerage accounts: These are standard accounts opened by one person. You have full control over your investments and are responsible for any tax implications. The simplest type is a cash account, where you buy securities using the funds available in your account. For more experienced investors, there’s also the option of a margin account, allowing you to borrow money from the brokerage against the value of your account to purchase additional stocks.
Joint brokerage accounts: These are shared by two or more individuals, usually spouses or partners, and can be either cash or margin accounts. They can also be set up as joint tenants with rights of survivorship, meaning if one account holder passes away, ownership automatically transfers to the surviving account holder(s).
Managed accounts: These are professionally managed, with a portfolio manager making investment decisions on your behalf. The portfolio is tailored to your needs, goals, and investment style.
Accounts for Specialized Goals
If you’re investing in stocks for specific goals, like your own education or your child’s, there could be tax benefits to using different types of accounts. It’s worth looking into these options, as they offer special tax incentives that could work in your favor.
- Dividend reinvestment plan (DRIP) accounts: Some brokers offer these accounts, which automatically reinvest your stock dividends to buy more shares, often without charging commissions for the extra shares.
- Education Savings Accounts: These accounts come with tax advantages when the funds are used for qualified educational expenses.
- Health savings account (HSA): Contributions to HSAs are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
- Trust and custody accounts: Trust accounts are managed by a trustee for the benefit of a third party as outlined in a trust agreement. Custody accounts allow minors to own
- stocks and other assets, with a custodian managing the account until the minor reaches adulthood.
Step 6: Learn the Costs of Investing
Commissions and Fees
Apart from considering reputation and how well a brokerage aligns with your investment strategy and goals, broker fees are a crucial factor to consider when selecting a brokerage firm, which is the next step.
Let’s get ready. Traditionally, brokerages charged fees for things like trade commissions, account maintenance, and extra services such as research or financial advice. However, the world of brokerage fees has changed a lot in recent years.
Here’s what you should keep an eye out for as you do your research:
Trading commissions: Brokers may charge a commission every time you trade a stock, whether it’s buying or selling. These fees can range from $2 to $10 per trade. Some brokers don’t charge any trade commissions but may compensate with other fees. Depending on how frequently you plan to trade, these fees can accumulate, impact your portfolio’s returns, and reduce the funds available for investment.
Let’s break it down: Say you invest $1,000 in one share of stock from five different companies. If each transaction costs $10, you’d pay $50 in trading fees, which equals 5% of your $1,000. If you decide to sell these stocks later, the total round-trip cost (buying and then selling) would amount to $100, or 10% of your initial $1,000 investment.
Maintenance fees: Some brokers charge monthly or annual fees to keep your account active. However, these fees might be waived if your account balance exceeds a certain threshold.
Service fees: You could face extra charges for inactive accounts or for services like broker-assisted trades, premium research access, or trading on margin (i.e., borrowing). Most of these fees and associated services are optional.
Subscription-based models: With Generation Zers and Millennials becoming more prominent in investing, financial advisors and brokers are adapting to clients accustomed to monthly or yearly app fees. Instead of paying per transaction or for specific services, you pay a flat monthly or annual fee. Your subscription might include perks like commission-free trades, research tools, and premium support.
Some platforms offer tiered subscription levels, offering more features or lower margin rates at higher rates. Just like with Hulu or your favorite online magazine, it’s essential to assess how much you’re utilizing what you’re paying for. If not, you might consider downgrading to a lower tier or switching brokers altogether.
Step 7: Pick Your Broker
Full-Service Brokers
These firms provide a wide range of traditional brokerage services, offering personalized financial advice for things like college planning, retirement planning, estate planning, and other life events. This tailored guidance justifies the higher fees they usually charge, which typically include a percentage of your transaction value or assets under management, along with sometimes an annual membership fee. Minimum account sizes can start at $25,000.
Discount Brokers
These platforms provide you with tools to choose your investments and make trades. Some even offer a “set-it-and-forget-it” robo-advisory service. Many also include educational resources on their websites and mobile apps. Some brokers have no or very low minimum deposit requirements, but they might have other fees and conditions. Make sure to look into both as you search for a brokerage that suits your financial needs.
Here, we’ll kick things off by comparing some of the top online brokers:
| Compare the Best Online Brokers | ||||
| Company | Category | Investopedia Rating | Account Minimum | Basic Fee |
| Fidelity Investments | Best Overall, Best for Low Costs, Best for ETFs | 4.8 | $0 | $0 for stock/ETF trades, $0 plus $0.65/contract for options trade |
| TD Ameritrade | Best for Beginners and Best Mobile App | 4.5 | $0 | $0 for stock/ETF trades, $0 plus $0.65/contract for options trade |
| Tastyworks | Best for Options | 3.9 | $0 | $0 stock/ETF trades, $1.00 to open options trades and $0 to close |
| Interactive Brokers | Best for Advanced Traders and Best for International Trading | 4.2 | $0 | $0 for IBKR Lite, Maximum $0.005 per share for Pro platform or 1% of trade value |
We suggest the top products based on an independent review process, and advertisers don’t affect our choices. We might receive compensation if you check out partners we recommend. Check our advertiser disclosure for further details.
Robo-Advisors
For a hands-off approach, robo-advisors or automated investment platforms are both cost-effective and quite easy to use. If you go this route, you won’t be alone. According to Charles Schwab, 58% of Americans plan to use some form of robo-advisor by 2025.
An app or platform gathers details about your financial goals, risk tolerance, income, savings, and more.
Its robo-advisor then uses specialized algorithms to create and manage your investment portfolio. Geared towards everyday investors, robo-advisors are affordable, often with minimal or no minimum balance requirements, and designed for those who are new to investing or in the intermediate stage. However, they usually offer limited trading options and lack the personalized touch of traditional financial planning, which is better suited for long-term investing.
If this sounds appealing, we’ll get you started below by comparing the top robo-advisors.
| Compare the Best Robo-Advisors | ||||
| Company | Category | Investopedia Rating | Account Minimum | Fees |
| Wealthfront | Best Overall / Best Goal Planning | 4.8 | $500 | 0.25% for most accounts, no trading commission or fees for withdrawals, minimums, or transfers. 0.42%–0.46% for 529 plans |
| Betterment | Best Beginners / Best Cash Management | 4.5 | $0 | 0.25% (annual) for digital plan, 0.40% (annual) for the premium plan |
| Interactive Advisors | Best SRI / Best Portfolio Construction | 4.2 | $100 to $50,000 | 0.08-1.5% per year, depending on advisor and portfolio chosen |
| M1 Finance | Best Low Costs / Best Sophisticated Investors | 4.2 | $100 ($500 minimum for retirement accounts) | 0% |
| Personal Capital | Best Portfolio Management | 4.2 | $100,000 | 0.89% to 0.49% |
| Merrill Guided Investing | Best Education | 4.4 | $1000 | 0.45% annually, of assets under management, assessed monthly. With advisor – 0.85% Discounts available for Bank of America Preferred Rewards participants |
| E*TRADE | Best Mobile | 3.9 | $500 | 0.30% |
Step 8: How To Fund Your Stock Account
Now that you’ve decided on the type of account to open, it’s time to fund it. Here’s what you need to do:
Choose a brokerage: Start by selecting a brokerage firm, like one of the major online firms, that suits your investment goals and preferences or is simply convenient for you. Consider factors such as fees, available investment options, and how user-friendly the platform is.
Pick your account type: Decide whether you want to open a cash account, where you pay for investments in full, or a margin account, which allows you to borrow to purchase securities.
Open your account: Once you’ve chosen a brokerage and account type, you’ll need to open your account. This involves providing your personal information, including your Social Security number, address, employment details, and financial situation. It typically takes around 15 minutes.
Link your bank accounts: The most common way to fund your stock account is by linking it to your bank account. You can do this online through the brokerage’s platform, where you’ll enter your bank account number and routing number. Many brokerages allow you to verify your account via small test transactions.
Transfer or deposit your first funds: Once your bank account is linked, you can transfer funds to your brokerage account, usually through an electronic funds transfer. This process may take a few days to complete. Alternatively, you can opt for wire transfers for faster funding, though they often come with higher fees. Some brokerages still accept physical checks if you prefer this method.
Set up periodic transfers: If you plan to make stock purchases regularly, consider setting up automatic transfers from your bank to your brokerage account.
Start investing: Once your funds are verified in your account (don’t worry, the brokerage won’t let you trade otherwise), it’s time to start selecting stocks that align with your investment goals.
Step 9: Pick Your Stocks
Picking the right stocks can feel overwhelming, even for seasoned investors. For beginners, it’s best to focus on stocks with stability, a solid track record, and potential for consistent growth. Avoid jumping into risky stocks right away, hoping for a quick win. Long-term investing is typically about taking it slow and steady, not rushing in. Here are some stocks that are reliable choices to start with:
- Blue chips: These are shares of large, well-established companies that have a strong financial standing and a history of consistent performance. They’re often found in indices like the Dow Jones Industrial Average or the S&P 500. These companies are typically leaders in their industries and provide stability even during market fluctuations.
- Dividend stocks: Companies that regularly pay dividends can be a great option for beginners. Dividends provide you with a steady income, which you can reinvest to purchase more stock. Check out How to Buy Dividend Stocks to kick off your journey.
- Growth stocks: Investing in stocks with high potential for growth can offer big returns, but it also comes with greater risk. Beginners interested in growth stocks should look into industries with long-term potential, such as technology or healthcare.
- Defensive stocks: These are found in industries that tend to perform well even during economic downturns, like utilities, healthcare, and consumer goods. They provide stability during market volatility, especially for those just starting out.
- ETFs: Exchange-traded funds (ETFs) are traded like stocks and track various indexes or sectors. They offer a low-cost way to invest in a diverse range of assets. ETFs often mirror specific market indexes, such as the S&P 500, providing instant diversification and reducing the risk associated with individual stocks. As you gain experience, you can explore funds that align with your interests, investment goals, or values, such as those tracking environmental, social, and governance stocks.
Starting with a conservative approach is wise. Focus on stocks or funds that provide stability and have a proven track record. This will give you the confidence and returns you need as you continue to grow your investing knowledge.
Step 10. Keep Learning About Investing In Stocks
Investing in stocks is a journey of continuous learning— even the most successful investors are picking up new tips and strategies every day. With the stock market always changing, it’s crucial to stay informed and revisit Step 1 regularly, reviewing your goals, available funds for trading, investment style, and more. Here are some final tips for now:
Keep up with reading: Regularly visit trustworthy financial news websites to stay updated on the global economy, industry trends, and the companies you’ve invested in. Be cautious of websites and books promising easy returns or quick tricks—opt for genuine tips instead. Books covering investment strategies, stock market fundamentals, and diversification techniques can be incredibly helpful.
Practice with stock simulators: These platforms let you trade stocks using virtual money, offering a risk-free way to apply investment theories and test strategies. Investopedia’s simulator is a great option and it’s completely free to use.
Understand diversification: After taking your initial steps, it’s time to diversify your investments across various asset classes to minimize risk and potentially increase returns. When you’re ready, we’ll guide you through the process of diversifying your portfolio beyond stocks.
Just like financial planning is an ongoing process, learning about stock investing is never-ending. The more you know, the better equipped you’ll be to make smart investment choices and adjust to shifts in the market.
What Is the Difference Between a Full-Service and a Discount Broker?
Full-service brokers offer a wide range of financial services, providing advice on retirement, healthcare, education, and more. They also offer various investment products and educational resources. These brokers typically serve high-net-worth individuals and require substantial investments. On the other hand, discount brokers have lower entry thresholds, offering a simpler set of services, allowing you to place individual trades, and providing educational tools.
What Are the Risks of Investing?
Investing means putting your money into something now to achieve a financial goal in the future. Different investments carry varying levels of risk, with some being riskier than others. There’s always a chance that your investment won’t grow in value over time. That’s why it’s important for investors to think about how to handle risks to reach their financial goals, whether they’re short-term or long-term.
How Do Commissions and Fees Work?
Most brokers charge customers a commission for each trade they make. Because of these commission costs, investors usually think it’s smart to limit how many trades they make to avoid paying extra fees. Some other types of investments, like exchange-traded funds, have fees to cover the costs of managing the fund.
The Bottom Line
Beginners can dive into stock investing with a modest amount of money. It’s essential to do your research to define your investment goals, assess your risk tolerance, and understand the costs associated with investing in stocks and mutual funds. You’ll also need to explore different brokers and their fees to find the one that suits your investment style and objectives best. Once you’ve done your homework, you’ll be ready to tap into the potential rewards that stocks offer in the years ahead.
Trading options involve significant risks and may not be suitable for all investors. Certain complex options and strategies carry additional risks. Before trading options, make sure to read the Characteristics and Risks of Standardized Options. If applicable, supporting documentation for any claims will be provided upon request.
Please note that there is an Options Regulatory Fee applied to both option buy and sell transactions, and this fee is subject to change. For more details, refer to Fidelity.com/commissions.
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